Friday, March 6, 2009

Whither Technology and Wall Street?

This has not been a good 6 months for the marriage of Wall Street and technology. Hedge funds and algo trading were supposed to stabilize markets (see e.g., here), but it’s arguable that aggressive shorting coupled with increased automation has had the opposite effect. Meanwhile, the one-year old MoneyTech conference was cancelled, presumably due to lack of registrations.

Having said that, it’s obvious that technology will continue to drive trading practices, particularly in the areas of managing trade path risk and seeking alpha in non-numerical sources. As the far as the former is concerned, there is still the challenge of minimizing of transaction costs while making substantial trades without moving prices. Re the latter, as blogs and other non-traditional news and opinion sites burgeon, the trader is left with a bewildering array of information sources, while the programmer is subject to the temptations and pitfalls of sentiment analysis and data mining (c.f., David Leinweber, ”Algo vs. Algo”, The Institutional Investor’s Alpha, February 2007).

There is no way back, and I think that the old truism applies, whereby the antidote to problems created by technology is more and better technology. I also think that, as Moore’s Law runs out of steam, gains driven largely by computing power will have to be augmented by real advances in algorithms and representations. In other words, computer scientists may actually have to work for a living once more.